Abstract
This paper studies causal relationships and the potential of improving conditional quantile forecasting between Bitcoin and seven altcoin markets as well as between Bitcoin and three mainstream assets, namely gold, oil, and the S&P500, by applying the Granger-causality in distribution and in quantiles tests. We find significant bidirectional causality between Bitcoin and all altcoins and assets considered in the two distribution tails. An enhanced forecast of Bitcoin price returns is thus derived by conditioning on altcoins or assets and vice versa during extreme market conditions. However, under normal market conditions the results for the centre of the distribution of the Bitcoin price returns conditional on altcoins depend on both the altcoin considered and quantile under investigation. We also find evidence that Bitcoin is not isolated from financial markets, while this developing financial asset is a strong safe-haven for oil and a weak safe-haven for S&P500, but it cannot be considered as either a weak or strong safe-haven for gold. Our results reveal a more complete relationship between Bitcoin and altcoins as well as financial assets than was previously considered.
Highlights
The substantial growth in both the price and publicity surrounding cryptocurrencies at large has generated a substantial debate as to the regulatory requirements, the inherent dangers that are sourced within their structure, within the growing number of substantial cases of Preprint submitted to International Review of Financial Analysis theft, evidence of market manipulation and other types of illegality that have taken place in recent years
Since the aim of this study is to explore the potential of improving quantile forecasting of Bitcoin using information from altcoins and financial assets and vice versa, it is of great importance to further investigate which specific quantile leads to Granger-causality in distribution (GCD)
The findings demonstrate that when Bitcoin’s returns are at the low quantile of α2 = 0.1, and Bitcoin is in bear market, the cross-quantilograms pα(k) for α1 ≤ 0.3 are negative and significant at most lags providing evidence of negative directional predictability from Bitcoin to gold when both Bitcoin and gold are in bear markets
Summary
The substantial growth in both the price and publicity surrounding cryptocurrencies at large has generated a substantial debate as to the regulatory requirements, the inherent dangers that are sourced within their structure, within the growing number of substantial cases of Preprint submitted to International Review of Financial Analysis theft, evidence of market manipulation and other types of illegality that have taken place in recent years. To the best of the authors’ knowledge, this is the first study to thoroughly explore the dependence between Bitcoin and altcoin, commodity or stock returns across the entire range of quantiles using several copula functions and Granger-causality tests in each conditional quantile, with the results providing a more complete overview of the Granger-causality in distribution and in quantiles. This is the first study to apply the directional predictability test of Han et al [2016] to test for the predictability of Bitcoin using altcoins or commodities as predictors as well as the predictability of altcoins and commodities while utilising Bitcoin as a predictor, further complementing our analysis.
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